The New Moving Target

Friends of Binc, old and new, ask me, “what’s the word on the street?” After all, we serve an array of diverse and top technology companies, and via that lens, we’re afforded a unique view of the overall market.

As we progress into the new year, what has struck me most is the new moving target of tech companies’ valuations. Some are referring to this as a bubble, some as a controlled deflation.  I’m simply referring to this as a moving target or what I believe will ultimately show to be a simple resettling.  Regardless, this has caused a fair amount of unrest, especially as we see some unicorns being written-off and devalued, while others aren’t growing fast enough. This may seem confusing, and to some, even concerning, but from our vantage point, the new playing field is clear.  

Over the last few years, we’ve seen the “IPOs can wait” trend, as late-stage private companiesheld off on going public, in exchange for lofty and difficult-to-justify valuations. These valuations had the benefit of circumventing the volatility of the public markets and therefore not being beholden to real time market shifts.

More recently, late-stage private companies are being compared to their public peers, thus the benefit of waiting to go public doesn’t have the same value it once held. With publicly-traded technology companies experiencing market ups-and-downs, private technology companies are now under more scrutiny, and a market-wide questioning of late-stage private evaluations has emerged. This has created a ripple effect, causing startup valuations at all stages to be put under similar critical inquiry.

Due to this ripple effect, every company in the market is going through some version of a resettling process and we’ve found they fall into one of the following three categories:

  • Companies who raised money at bloated valuations and are now considered devalued (i.e. underwater).
  • Companies who raised at valuations in line with current public/private comparables and have therefore reset onto a trajectory based on a more realistic and accurate starting point.
  • Companies who have budgeted the current valuation methodology into their operating. model and are therefore less affected by this resetting process and are continuing along their merry way.

The trick is to assess where each company now falls into:

  • If a company falls into the first, it’ll need to figure out whether or not it can weather a ‘down round’ or have enough cash in the bank to rebuild to its latest valuation.  This will likely come in the form of layoffs, pull back on hiring, reprioritizing on core initiatives, and pulling back on anything fringe. This will feel like a retrenching, rebuilding, and, very possibly, a death march. There will likely be some carnage here as the vultures are already circling.
  • If a company falls into the second, not a ton is changing. It’s raised recently, has cash in the bank, achieved its latest milestone, and is on a trajectory to achieve the next one.
  • If a company falls into the third, it’s sitting pretty right now. It’s made some right decisions and is able to benefit from some of the spillage in the market.

If you’re an Employer/Recruiter:

Develop a deep understanding of how your company and others in your peer class are being viewed and valued in both the private and public markets.

  • Be able to tell a clear and verifiable story of how this affects your company and its current value.
  • Be explicit about how this affects your anticipated growth plans and identify some clear and achievable milestones that your company can rally around to achieve a desired outcome.
  • Take a hard look at your equity offering and be sure you’re both representing it accurately; take responsibility for how it’s being valued by your current and future team.
  • Openly discuss all this with your team and recruiters.
  • It’s OK if you’re below or above your previous valuation. The important thing here is to address the situation proactively and with clarity. Because if you don’t, your team members will arrive at their own conclusions and be influenced by friends, the media, and other potential employers.

If you’re an Employee/Candidate:

  • Take time to be versed in/stay abreast of the market.
  • Understand the information your employer is advised/recommended to share.
  • Educate yourself about startup equity and ensure you’re getting good professional guidance with regards to your equity investment and management.
  • There’s absolutely no right answer as to which type of employer is the most advantageous to work for.  It ultimately comes down to your priorities and interests.  What’s important though is that you’re very aware and clear on where your company falls along the spectrum and that you have clear expectations re what to expect of the experience.  

In closing, I don’t believe what we’re experience is a bubble and rather a resettling of the tech company landscape.  Yes, some companies will wash out while others will spawn, but with areas like VR/AI/Robotics still being in very early stages, with social/sharing/mobile still with plenty of room to grow along their maturity spectrum and with whole industries still ripe for transformation, the future remains bright for tech.

Boris Epstein